## Valuation of Loans — f9-valuation-of-loans-fair-value

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### Background and current statistical standards
- The 2008 SNA, BPM6, and MFSMCG require loans to be valued at the amount that the debtor must pay to extinguish the claim (nominal value).
- Nominal value equals outstanding principal including any accrued interest and any subsequently advanced funds less repayments (BPM6 paragraph 3.88.b).
- 2008 SNA (paragraph 13.62) and BPM6 allow valuation “as if” assets were acquired on the balance-sheet reference date (e.g., discounted present value) for assets not traded on organized markets, but in practice loans in core accounts are recorded at nominal value.
- Fair value is introduced in the 2008 SNA as a memorandum-item approximation to market-equivalent value; MFSMCG recommends NPLs remain loans and recorded at nominal value even if sold at a small fraction of nominal value (MFSMCG, paragraph 4.101).
- Loan loss provisions are recorded in MFSMCG in the core accounts as a liability (Other accounts payable) while loan assets remain measured at nominal value (MFSMCG, paragraph 5.126).
- When loans are sold below or above nominal value, the transaction is recorded at market/transaction value and sellers/buyers record “other price changes in assets” equal and opposite to reconcile stocks (BPM6 paragraph 9.33; MFSMCG paragraph 5.128).

### Concerns motivating reconsideration of nominal valuation
- The review for 2008 SNA predated the 2008 financial crisis; crisis-era interventions (asset transfers, acquisitions, creation of NPL-assuming units) make nominal valuation potentially misleading for government exposure and net worth.
- Memorandum items showing fair value do not feed into main indicators (net lending/net borrowing, change in net worth) used in national accounts and GFSM 2014; reliance on nominal valuation risks optimistic asset-side valuations and distorted change in net worth.
- Divergences from business accounting (IFRS, IPSAS) where not driven by statistical principles are undesirable.
- Arguments for retaining nominal valuation include consistency with debtor accounting (debtor records full amount until liquidation/agreement) and preservation of symmetry between creditor and debtor given potentially subjective fair-value estimates.

### Options for change and their variants
- Option 1 — Maintain nominal valuation
  - Option 1a — Do not change current rules: loans recorded at nominal value in both creditors’ and debtors’ balance sheets; fair value remains a memorandum item.
  - Option 1b — Retain nominal valuation but clarify and extend conditions under which loan values may be reset beyond bankruptcy/liquidation/court order to include formal, publicly known processes (e.g., bank recovery operations), and explicitly describe such cases in “other changes in assets—Debt Operations” (2008 SNA paragraphs 12.38–12.42).
- Option 2 — Shift to fair valuation
  - Option 2a — Simplified fair value (written-down): nominal value less expected loan losses (uses initial/at inception discount rate).
  - Option 2b — Full fair valuation: current market-equivalent fair value using current discount rates.

### Analysis of Option 1 variants
- Option 1a — Advantages and disadvantages
  - Advantage: Prevents artificial improvements in debtor net worth when creditworthiness falls; consistent with concept of a non-traded, “locked in” instrument.
  - Problem: Overstates asset-side valuation of financial sector balance sheets and provides a distorted picture; memorandum items likely underused.
- Option 1b — Rationale, proposed change, and trade-offs
  - Rationale: MFSMCG recognizes nominal value provides an incomplete view for NPLs (MFSMCG, paragraph 5.123); memorandum items alone are insufficient.
  - Proposal: Extend value-reset allowance from bankruptcy/liquidation/court decisions to formally documented, publicly known restructuring/recovery actions that impose losses on shareholders, and to deep-discount transactions or extraordinary events; separate permanent reductions from revaluations in OCVA.
  - Outcomes: Loans still recorded at nominal value; standard provisioning does not affect balance sheets; value resets occur only in tightly defined extraordinary circumstances.
  - Advantages: Improves measurement for fiscal and financial stability analysis while minimizing compilation burden.
  - Drawbacks: Does not fully align with the SNA general market-valuation principle (paragraph 2.60); memorandum items on fair value should be retained.

### Analysis of Option 2 variants
- Core differences and implementation issues
  - Option 2a uses the original/at inception discount rate; Option 2b uses current rates. Both require regular valuation adjustments for impairment and market-rate changes.
  - Core accounts require horizontal consistency between counterparties; introducing fair valuation demands additional rules to maintain symmetry and comparability.
  - Aggregate loan loss provisions are generally available; breakdowns by counterpart are not always available but are recommended as memorandum items (MFSMCG paragraph 5.142).
- Advantages of full fair valuation (Option 2b)
  - Consistency with SNA market-valuation principle.
  - Better reconciliation with business accounting (IPSAS 41, IFRS 9) and improved relevance, understandability, comparability.
- Disadvantages and challenges
  - Cross-country inconsistencies where creditor and debtor valuations diverge are likely.
  - Significant statistical burden and practical difficulties, notably for public-sector portfolios and resident–nonresident transactions.
  - Would prompt reexamination of valuation treatment for other instruments (deposits, accounts receivable/payable).

### Symmetry between debtors and creditors and practical reconciliation
- System requirement: debtor and creditor records must match (BPM6 paragraphs 3.122–3.125).
- Nominal valuation supports symmetry by being independent of differing estimates.
- The creditor viewpoint can be imposed to maintain balance (example: write-offs); clarifying and extending creditor-view rules (including write-off reversals consistent with MFSMCG paragraph 5.231) can mitigate asymmetry without wholesale rule changes.

### FITT outcome, majority view, and practical considerations
- FITT majority supported maintaining nominal valuation, either unchanged (Option 1a) or extended for extraordinary publicly known events (Option 1b), provided loan-reset conditions are tightly defined and limited in scope.
- The GN rejects Option 2a and Option 2b and favors Option 1b; one co-author supports Option 2a.
- Practical difficulties noted: full market valuation implementation challenges, limited access to partner-country creditor/debtor data, and potential need to address valuation for other instruments if deviating from status quo.
- An extended variant measuring transferred loans at transaction value was discussed but lacked sufficient support.

### Policy implications and recommended statistical actions
- If retaining nominal valuation, strengthen guidance to:
  - Define narrowly the extraordinary publicly known events that permit loan-value resets and describe associated OCVA treatment.
  - Maintain and improve memorandum items: nominal value of NPLs, fair-value approximations, expected loan losses disaggregated by debtor sector, accrued interest, and arrears (see Manual Paragraphs 5.142–5.144).
- If shifting toward fair valuation, require:
  - New memorandum items presenting nominal values alongside fair values.
  - Detailed guidance to ensure cross-counterparty consistency and treatment of resident–nonresident transactions.
  - Additional methodological work on discount-rate choice (inception rate versus current rate) and on recording revaluation impacts in the revaluation account and IIP.

### Key definitions, methods, and rules cited
- Nominal value: outstanding amount the debtor owes, including accrued interest (BPM6 paragraph 3.88.b).
- Fair value: market-equivalent value between knowledgeable, willing parties; can be estimated using comparable market transactions or discounted present value of future cash flows (BPM6 paragraph 3.88.a; 2008 SNA paragraph 13.67).
- For recoverable-amount calculations (expected loan losses), use original yield to maturity as discount rate; for variable-rate loans use current yield to maturity; for secured loans base expected cash flows on net proceeds from collateral sale (Manual Paragraphs 5.147(a)–(c)).

### Worked illustrative example (numbers preserved exactly)
- Opening assumption: nominal value of loans = CU 1,300.0; market value (fair value) = CU 800.0.
- Sale at market price CU 800.0:
  - Realized holding losses for seller = CU 500.0.
  - Realized holding gains for buyer = CU 500.0.
  - No impact on net worth of both institutional units; assets and liabilities relocated.
- Sale above market price at CU 1,000.0:
  - General government provides a capital transfer to seller = CU 200.0 (CU 1,000.0 minus CU 800.0 fair value).
  - Realized holding gains and losses reflected in revaluation account; transaction impacts net worth via the capital transfer and relocates assets and liabilities.

*Source: IMF Guidance Note — f9-valuation-of-loans-fair-value (SECTION I: THE ISSUE; related chapters and manual paragraphs).*

### SECTION I: THE ISSUE

### SECTION I: THE ISSUE

### Background and current statistical standards
- The System of National Accounts 2008 (2008 SNA), the sixth edition of the Balance of Payments and International Investment Position Manual (BP M6) and the Monetary and Financial Statistics Manual and Compilation Guide (MFSMCG) require loans to be valued at the amount that the debtor must pay to extinguish the claim, that is nominal value.
- Nominal value is linked to loans not being intended for trading in an organized market and thus lacking generally available market values. However, the 2008 SNA (paragraph 3.16) and BP M6 (paragraph 3.84) allow valuation “as if” assets were acquired on the balance-sheet reference date (e.g., by reference to the present value of future cash flows), as used for unlisted equity or infrequently traded debt securities.
- Values of loans to be recorded in the balance sheets of both creditors and debtors are the amounts of principal outstanding at the reporting date and “should also include any interest that has been earned but not been paid” (2008 SNA, paragraph 13.62).
- BPM6 defines nominal value (paragraph 3.88.b) as “the outstanding amount the debtor owes to the creditor, which is composed of the outstanding principal amount including any accrued interest. So, the nominal value reflects the sum of funds originally advanced, plus any subsequent advances, plus any interest that has accrued, less any repayments (which includes any payments covering interest accrual).”
- Guidance note F.8 suggests adopting the same definition in SNA and clarifying its calculation in line with the 2013 External Debt Statistics: Guide for Compilers and Users (EDS Guide), paragraph 2.34 (“the nominal can be calculated by discounting future interest and principal payments at the existing contractual interest rate”; more precisely—at the interest rate at inception).
- The 2008 SNA introduces fair value for memorandum items as the closest approximation to market-equivalent value, but loans in the core accounts (including NPLs) must be recorded at nominal value. BPM6 and MFSMCG follow the same approach, with MFSMCG recommending that NPLs remain classified as loans and recorded at nominal value even if sold at a small fraction of nominal value (MFSMCG, paragraph 4.101).
- MFSMCG aligns more closely with IAS/IFRS by recording loan loss provisions in the core accounts as a liability (loan loss provisions included in Other accounts payable), while maintaining loan measurement on the asset side at nominal value regardless of provisioning (MFSMCG, paragraph 5.126).
- Market value for loans is recognized in valuation of flows (transactions) when a loan is sold below or above nominal value; before and after the transaction, stocks remain at nominal value. Sellers and buyers record “other price changes in assets” equal and opposite to reconcile differences between nominal and transaction values (BPM6, paragraph 9.33; MFSMCG, paragraph 5.128). The guidance note focuses on stocks only.
- The topic relates to valuation of other investment instruments in external sector statistics and to GN F.8 (debt securities) and GN F.15 (debt concessionality), but the GN is focused on loans due to practical aspects.

### Concern in the current standards and reasons to consider changes
- The review leading to the 2008 SNA was completed before the 2008 great financial crisis; issues highlighted by the crisis and subsequent measures (including recording) were not fully considered.
- Government financial rescue interventions (e.g., transfers of financial assets, acquisition of existing loans, creation of units to assume NPLs) can make nominal valuation blur the economic representation of government exposure. Valuation at market value would allow imbalances to emerge and affect government net worth.
- Sensitivity to financial stability concerns has increased the need to avoid optimistic asset-side valuations in the financial sector. Memorandum items are useful but cannot fully substitute for consistent entries in core accounts; inclusion of loan valuation on the 2008 SNA research agenda (paragraph A4.40) signals revisiting the guidance.
- Memorandum items do not feed into main indicators (e.g., net lending/net borrowing, change in net worth) used in national accounts and GFSM 2014; valuation rules deviating from market criteria may distort change in net worth.
- Deviations from business accounting data (IFRS, IPSAS) where not dictated by statistical principles are undesirable.
- Arguments for retaining nominal valuation remain: consistency with debtor accounting (debtor records full amount until liquidation or agreement), and symmetry between debtor and creditor when fair value estimation can be subjective and differ between parties.

### Issues for discussion: alternative options (two options, each with two variants)
- Option 1 — Maintaining the Current Nominal Valuation
  - Option 1a — Do not change the current valuation; retain instructions that loans be recorded at nominal value in balance sheets of both creditors and debtors.
  - Option 1b — Retain nominal valuation but improve and clarify SNA and BPM guidance within the existing framework, allowing for value reset beyond bankruptcy and liquidation when there is public evidence of loan deterioration.
- Option 2 — Shifting to Fair Valuation
  - Option 2a — Change valuation rules to a simplified estimate of fair value: nominal value less expected loan losses.
  - Option 2b — Change valuation rules to full fair valuation at any time for all loans in core accounts.

### Option 1a: Do not change the current valuation of loans
- Under Option 1a:
  - Fair value remains limited to memorandum items and NPLs.
  - Minor consistency adjustments in updated SNA may be required (e.g., alignment with GN F.8 and ESA 2010).
- Main advantage:
  - Prevents artificial improvements in the debtor's net worth when creditworthiness decreases; consistent with opportunity cost of a non-traded, “locked in” instrument.
- Main problem:
  - Overstates asset-side valuation of financial sector balance sheets, providing a distorted view of financial position. Memorandum items reflecting fair value will likely remain underemphasized by statisticians and users.

### Option 1b: Improving the existing framework
- Rationale:
  - MFSMCG recognizes nominal value provides an incomplete view, particularly for nonperforming loans (MFSMCG, paragraph 5.123). Memorandum items alone do not resolve this inconsistency.
- Current narrow allowance for value reset:
  - Value resets are allowed in bankruptcy, liquidation, or as a result of a court order (2008 SNA, paragraph 12.40; BPM6, paragraph 9.9; GFSM 2014, paragraph 10.57). “Other factors” are not described in 2008 SNA.
- Proposal under Option 1b:
  - Extend the possibility of resetting loan values beyond bankruptcy, liquidation, and court decisions to cases of reassessment via formal, publicly known processes (e.g., bank recovery operations) that impose losses on shareholders.
  - Include evidence of deterioration from specific transactions at deep discount or extraordinary events.
  - Achieve this by extending the “other changes in assets—Debt Operations” section in 2008 SNA (paragraphs 12.38–12.42) and corresponding manual parts, describing cases of permanent reduction in loan value and separating them from cases managed via opposite revaluations.
- Under Option 1b outcomes:
  - Loans still recorded at nominal value; standard provisioning does not affect balance sheets; continuous revaluations for expected losses or market changes would not occur.
  - Shift toward the creditor viewpoint by clarifying when loan values are to be reduced in a larger set of circumstances.
- Advantages:
  - Improves measurement of financial positions for fiscal and financial stability analysis while minimizing compilation burden.
- Drawbacks:
  - Does not fully align with the general market valuation principle (2008 SNA, paragraph 2.60). Memorandum items on fair value should be retained.

### Options 2a and 2b: Changing the existing framework to fair valuation
- Both options propose shifting to fair valuation for all loans in core accounts.
- 2008 SNA defines fair value as the amount approximating the value from a market transaction between two parties, which “can be established using transactions in comparable instruments, or using the discounted present value of cash flows, or may sometimes be available from the balance sheets of the creditor” (2008 SNA, paragraph 13.67).
- The 2008 SNA also allows a fourth, simplified approach for memorandum items: nominal value less expected loan losses.
- MFSMCG (paragraphs 5.44–5.49) supplements guidance on methods and differences with historic cost, amortized, face, and book value.
- Considerations:
  - Having four alternatives aids compilation for memorandum items but is problematic for core accounts because core accounts require horizontal consistency between counterparties.
  - Introducing fair valuation in core accounts would require additional rules to ensure consistent treatment between counterparties.

*Source: f9-valuation-of-loans-fair-value - SECTION I: THE ISSUE (IMF).*

### 22. As the pure fair value, the simplified (written-down) value in Option 2a takes continuously

### f9-valuation-of-loans-fair-value - 22. As the pure fair value, the simplified (written-down) value in Option 2a takes continuously

### Overview of valuation options and core differences
- Three main valuation approaches discussed: Option 1a (nominal value, status quo), Option 1b (nominal adjusted for extraordinary events/publicly known loan resets), and Option 2 (fair value) with variants Option 2a (simplified written-down value: nominal less expected losses) and Option 2b (full fair value using current discount rates).
- Option 2a and Option 2b differ by the discount rate used: Option 2a uses the initial/at inception rate while Option 2b uses current rates.
- The principal distinction between Option 2 variants and Option 1b is the regular use of provisions for impaired loans, implying revaluations of loans even in the absence of transactions. In Option 1b, loan values are revised only in cases of extraordinary events or formal procedures.
- Data requirements: aggregate loan loss provisions are generally available; breakdowns by counterpart are not always available but are part of memorandum items recommended by the MFSMCG (paragraph 5.142).

### Implications of adopting full fair valuation (Option 2b)
- If Option 2b is adopted with full shift to fair valuation in the core accounts:
  - New memorandum items should be introduced to present the nominal values of loans (analogous to debt securities).
  - The core problem is achieving cross-country consistency affecting the quadruple entry system when creditor records do not match debtors.
  - Use of nominal values as memorandum items can partially mitigate inconsistencies between creditor and debtor positions.
- Fair valuation must account for both market rate changes and impairment:
  - The current or expected rate used for discounting future flows may differ from the contractual/inception rate and is subject to change over time (see MFSMCG, Box 5.1).
  - Such changes should be recorded in the revaluation account and reflected in the IIP.
- Advantages of fair valuation:
  - Full consistency with the general principle of market valuation in the SNA and BPM.
  - Better reconciliation with business accounting data; alignment with IPSAS 41 and IFRS 9 would leverage extensive global guidance.
  - Would reduce unnecessary differences between financial reporting and statistical reporting, improving relevance, understandability, and comparability.
- Disadvantages and challenges:
  - Potential cross-country inconsistencies where creditor and debtor views diverge.
  - Significant statistical burden and practical difficulties in changing current practice.
  - Reconciliation of asset and liability sides would require additional methodological work and specific guidance for resident–nonresident transactions.

### Symmetry between debtors and creditors
- Symmetry requirement:
  - Recording the same value in debtor and creditor accounts is a fundamental system requirement (BPM6, paragraphs 3.122–3.125).
  - Nominal valuation has the advantage of being independent of potentially different estimates by the two parties.
- Creditor viewpoint as a solution:
  - The 2008 SNA sometimes imposes one sector’s view on another to maintain balance (example: write-offs — creditor viewpoint required so the corresponding liability is removed from the debtor’s balance sheet; 2008 SNA paragraph 12.40).
  - Addressing loan symmetry via the creditor viewpoint is common across Option 1b, Option 2a, and Option 2b; it does not by itself require rule changes but benefits from clarification.
  - Extension of write-offs beyond bankruptcy, liquidation, and court orders and guidance on write-off reversals (consistent with MFSMCG paragraph 5.231) would help reconcile provisions and counterparties without asymmetry.

### Outcomes, majority view, and practical considerations
- Outcome of the GN:
  - The GN rejects Option 2a and Option 2b and favors Option 1b. One co-author supports Option 2a (nominal value less expected losses or written-down value).
- Practical difficulties emphasized by co-authors:
  - Full market valuation raises practical implementation difficulties, including issues with public sector loan portfolios.
  - Financial stability analysts need gauges of NPL components; core accounts and memorandum items are not always easily reconcilable.
  - Cross-border symmetry is unlikely to be achieved in practice because national compilers rarely have access to partner-country creditor/debtor data at the required level of detail.
- Wider instrument implications:
  - Deposits and accounts receivable/payable are recorded at nominal value and present similar valuation issues; adoption of Option 2b would open discussion about fair-valuation treatment for these instruments as well.
  - For deposits, sales at a fraction of nominal value and provisions for losses are uncommon, so valuation impacts may be smaller.
  - Any choice other than the status quo (Option 1a) would logically require considering corresponding changes for other financial instruments.
- FITT consensus:
  - Majority of FITT members supported maintaining nominal valuation of loans, either unchanged (Option 1a) or extended for extraordinary public events (Option 1b), provided loan-reset conditions can be tightly defined and limited in scope.
  - An extended variant to measure transferred loans at transaction value was discussed (transaction values are generally available in certain jurisdictions) but did not receive sufficient support and is not proposed in the GN.

### Questions for discussion (as posed in the GN)
- 1) What option do you favor for the valuation of loans: nominal value (Option 1) or fair value (Option 2)?
- 2) If nominal value (Option 1) is preferred, do you favor the status-quo (Option 1a) or extension allowing value reset in extraordinary publicly known events (Option 1b)?
- 3) If fair value (Option 2) is chosen, do you prefer full fair value (Option 2b) or the simplified written-down approach (Option 2a: nominal less expected loan losses)?

### Relevant 2008 SNA guidance cited
- Paragraph 2.60: "Assets and liabilities are recorded at current values at the time to which the balance sheet relates, not at their original valuation. Theoretically, national accounts are based on the assumption that the values of assets and liabilities are continuously uprated to current values, even if in fact uprating occurs only periodically. The appropriate valuation basis for assets and liabilities is the value at which they might be bought in markets at the time the valuation is required. Ideally, values observed in markets or estimated from observed market values should be used. When this is not possible, current values may be approximated for balance sheet valuation in two other ways, by accumulating and revaluing transactions over time or by estimating the discounted present value of future returns expected from a given asset (see also Chapter 13)."
- Paragraph 13.16: balance sheets should be valued as if assets were being acquired on the balance-sheet date; financial claims not traded on organized markets are valued at the amount the debtor must pay to extinguish the claim.
- Paragraph 13.18: observable market prices are ideal; when absent, estimate prices that would exist on the valuation date.
- Paragraph 13.19: current values may be approximated by accumulating and revaluing transactions or by discounted present value of future economic benefits.
- Paragraph 13.54: where financial assets and liabilities are regularly traded on organized markets, use current prices; nontraded financial claims valued at the amount to extinguish the claim; assets and liabilities should have the same value whether recorded as assets or liabilities.

*Source: IMF Guidance Note — f9-valuation-of-loans-fair-value.*

### Chapter 11 and part 4 of Chapter 17.

### Valuation of Loans — Chapter 11 and part 4 of Chapter 17

### Valuation principle and nominal value
- Loans are recorded in balance sheets of creditors and debtors at the amounts of principal outstanding, which "should include any interest that has been earned but not been paid" and any indirectly measured service charge (the difference between bank interest and SNA interest). (Chapter 11, Paragraph 13.62)
- The value of a loan "does not reflect the consequences of any interest payments due after the date of the balance sheet," even if specified in the original loan agreement. (Chapter 11, Paragraph 13.63)
- Loan positions are recorded at nominal value in the international accounts and sectoral balance sheets. (BPM6 Paragraph 3.86; BPM6 Compilation Guide Paragraph 9.33; MFSMCG Paragraph 2.34; Manual Paragraph 5.122)
- Nominal value is defined as the outstanding amount the debtor owes to the creditor, composed of outstanding principal including any accrued interest. (BPM6 Paragraph 3.88(b); EDS Guide Paragraph 2.34)

### Reclassification between loans and debt securities
- If there is evidence of a secondary market for a loan and frequent market quotations are available, the loan is reclassified as a security; if traded only once with no evidence of a continuing market, it remains a loan. (Chapter 11 Paragraph 13.64; MNAFP Paragraph 4.127)
- Loans that have become negotiable de facto should be reclassified under debt securities. (BPM6 Paragraph 3.86; EDS Guide Paragraph 2.40)

### Fair value, market-equivalent valuation, and methods
- Fair value is a market-equivalent value: "the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction." (BPM6 Paragraph 3.88(a); BPM6 Paragraph 7.48; MFSMCG Paragraph 5.44)
- Two general methods for establishing fair values:  
  - Relative valuation: use market prices of similar market-traded instruments. (MFSMCG Paragraph 5.45–5.46)  
  - Absolute valuation: discounted present values of future cash flows. (MFSMCG Paragraph 5.45, Paragraph 5.48)
- Valuation according to market-equivalent is needed for assets/liabilities not traded or infrequently traded; present value of future cash flows may be used provided an appropriate discount rate can be applied. (BPM6 Paragraph 3.85)

### Treatment of transactions versus positions; valuation differences
- Transactions in loans, deposits, and other accounts receivable/payable sold at a discount are recorded in the financial account at transaction values; positions remain at nominal value and the difference is recorded as valuation (other price) changes. (BPM6 Paragraph 3.82; BPM6 Compilation Guide Paragraph 9.33; BPM6 Paragraph 9.33)
- When loans are sold at below (above) nominal value, the seller records a revaluation equal to the difference between nominal and transaction value and the buyer records an opposite amount. (Manual Paragraph 5.128; BPM6 Compilation Guide Paragraph 9.33)

### Nonperforming loans (NPLs) — identification and memorandum items
- Definition guidance: A loan is nonperforming when payments of interest or principal are past due by 90 days or more, or interest payments equal to 90 days or more have been capitalized, refinanced, or delayed by agreement, or payments are less than 90 days overdue but there are other good reasons to doubt full payment. This definition is to be interpreted flexibly. Once classified as nonperforming, the loan (or any replacement loans) remain classified as such until payments are received or the principal is written off. (Chapter 11 Paragraph 13.66)
- Recommended memorandum items for nonperforming loans:  
  - The nominal value of loans so designated, "including any accrued interest and service charge." (Chapter 11 Paragraph 13.67; MNAFP Paragraph 4.154)  
  - The market equivalent value of these loans; the closest approximation is fair value. Fair value may be established using transactions in comparable instruments, discounted present value of cash flows, or data from creditor balance sheets. In absence of fair value data, show nominal value less expected loan losses. (Chapter 11 Paragraph 13.67; MNAFP Paragraph 4.154)
- The fair value of loans is shown as a memorandum item for creditors; if fair value data are not available, the nominal value of nonperforming loans should be provided as a memorandum item. These memorandum items are included for assets but not liabilities. (BPM6 Paragraph 7.46; BPM6 Paragraph 7.48; BPM6 Paragraph 7.51)
- Nonperforming loans are recorded at nominal value to allow comparison with total loans at nominal value; value should include accrued interest not yet paid. Loans remain in external debt or sectoral debt until written off, forgiven, or reorganized. (EDS Guide Paragraph 2.41; BPM6 Paragraph 7.51; Manual Paragraph 5.137)

### Expected loan losses, provisions, and recoverable amounts
- Expected loan losses should be provided as memorandum items disaggregated by economic sector of debtor. (Manual Paragraph 5.142; Manual Paragraph 5.143; Manual Paragraph 5.144)
- Expected loan losses categories (by security and recovery prospects):  
  - Full loss on unsecured loans (entire nominal value). (Manual Paragraph 5.146(a))  
  - Partial loss on unsecured loans (expected loss less than nominal value). (Manual Paragraph 5.146(b))  
  - Partial loss on secured loans (nominal value less recoverable proceeds from collateral). (Manual Paragraph 5.146(c))
- Expected loan loss equals "the difference between the nominal amount and the recoverable amount — that is, the present value of the expected cash flows." (Manual Paragraph 5.147)
- Discount rate rules for recoverable amount (consistent with IAS 39.63–65):  
  - Use the original yield to maturity on the loan as discount rate. (Manual Paragraph 5.147(a))  
  - For variable-rate loans, use the current yield to maturity. (Manual Paragraph 5.147(b))  
  - For secured loans, estimated cash flows should be based on expected net proceeds from collateral sale, netting costs incurred. (Manual Paragraph 5.147(c))

### Impaired loan trading and classification
- A nonperforming or otherwise impaired loan purchased at a fraction of nominal value should remain classified as a loan if the purchase is a one-off transaction. Retaining loan classification facilitates future posting of provisions for loan losses. (MFSMCG Paragraph 4.101; Manual Paragraph 5.141)
- Loans sold in secondary markets at deep discounts remain classified as loans unless there is evidence of secondary-market trading (market makers, frequent quotations), in which case classify as debt securities and record at market value. (MFSMCG Paragraph 4.101)

### Other changes in assets related to debt operations
- Bilateral debt forgiveness agreements extinguish the claim and give rise in the SNA to a capital transfer payable/receivable recorded in the capital account and simultaneous extinction recorded in the financial account; debt forgiveness usually concerns government debt. (Manual Paragraph 12.39)
- Changes in claims from debt assumption or rescheduling are reflected in the financial account when the terms of the debt contract change or when the institutional sector of creditor/debtor changes. Write-offs and write-downs without mutual agreement are excluded from the financial account and recorded in other changes in the volume of assets (OCVA). Corresponding liabilities must be removed from the debtor’s balance sheet to maintain total-economy balance. (Manual Paragraph 12.40)
- Most commercial situations recognizing impossibility of debt collection are treated as unilateral cancellation of debt; unilateral cancellation by a debtor (debt repudiation) is not recognized in the SNA. Write-downs reflecting actual market values are accounted for in the revaluation account; changes imposed solely to meet regulatory, supervisory, or accounting requirements are not recorded in the SNA. (Manual Paragraph 12.41)
- Debt defeasance does not, as such, remove liabilities from the SNA; it may change the institutional unit reporting them depending on whether paired assets and liabilities are placed in trust within the unit or transferred to another unit. (Manual Paragraph 12.42)

### Memorandum and supplementary items recommended for loans and sectoral presentation
- Recommended memorandum items to accompany sectoral balance sheets for loans include:  
  - Total accrued interest on loans for both assets and liabilities. (Manual Paragraph 5.142)  
  - Total amount of interest and principal arrears on loan assets and liabilities. (Manual Paragraph 5.142)  
  - Expected loan losses disaggregated by economic sector of debtor. (Manual Paragraph 5.142)  
  - Loans with maturity of one year or less by currency and by counterpart sector. (Manual Paragraph 5.142(1))  
  - Loans extended to nonresident financial corporations and loans received from them. (Manual Paragraph 5.142(2))
- Interest and principal arrears data should include all overdue payments that are past due and be disaggregated by borrowing sector where relevant. (Manual Paragraph 5.143)
- Provisions for loan losses are treated differently across frameworks: the 2008 SNA does not contain accounts for provisions for losses on loans (treated as bookkeeping internal entries and not recorded except as memorandum items for expected losses on NPLs), whereas monetary statistics classify provisions under Other accounts payable [MS]—other and treat them as precursors to write-offs recorded in OCVA. (Manual Paragraph 5.231)

### Worked example — sale of loans (illustrative figures)
- Opening assumption: nominal value of loans = CU 1,300.0; market value (fair value) = CU 800.0. (MNAFP Worked example Paragraphs 4.130–4.131)
- Option 1: Loans sold at market price (fair value) CU 800.0. Result: realized holding losses for the seller CU 500.0 and realized holding gains for the buyer CU 500.0; no impact on net worth of both institutional units; relocation of assets and liabilities occurs. (MNAFP Paragraphs 4.132–4.133)
- Option 2: Loans sold above market price at CU 1,000.0. Result: general government provides a capital transfer to the seller of CU 200.0 (CU 1,000.0 minus CU 800.0 fair value); realized holding gains and losses are reflected in revaluation account; transaction impacts net worth via the capital transfer and relocates assets and liabilities. (MNAFP Paragraphs 4.134–4.135)

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_Source: https://www.imf.org/-/media/files/data/statistics/bpm6/fitt/f9-valuation-of-loans-fair-value.pdf_